Your chances of being audited or otherwise hearing from the IRS escalate depending upon various factors, including your income level, the types of deductions or losses claimed, the business in which you're engaged and whether you own foreign assets.
1. Filing a Schedule C
Business income and expenses triples your odds of being audited. Not surprising when you consider that Schedule C filers are estimated to report only 57% of their income, totaling roughly $68 billion in unpaid taxes each year, according to Barron’s.
2. You’re self-employed.
When you work for a large corporation, your employer typically withholds your taxes throughout the year and reports your income to the IRS, making it a lot harder to find wiggle room in the numbers, intentionally or unintentionally. Because it’s easier to fudge figures on both the revenue and the expenses side when you work for yourself, the IRS may take a greater interest in your returns.
3. Someone ratted on you.
The IRS rewards whistleblowers with a cash reward for information that leads to a successful audit. In 2014, the service paid out more than 100 rewards worth more than $52 million in total. Additionally, the IRS in the past has launched investigations based on news reports and even social media posts.
4. You Took an Early Payout from a Retirement Account.
The IRS is paying special attention to owners of traditional IRAs, 401(k)s, and other workplace retirement plans who withdraw sums from their accounts before age 59 1/2. That’s because those distributions are subject to a 10% penalty in addition to regular income tax.
5. You have a shady tax preparer.
Once the IRS identifies a tax preparer that has cut corners, the agency may go over some or all the returns that the preparer filed to find other potential discrepancies.
6. You claim large deductions.
Unusually large write-offs — especially relative to your income — can attract IRS scrutiny. Charitable donations, especially non-monetary kinds, are among the most common to contain a discrepancy between the value of the specific good and the actual write-off. Like document matching, discrepancies for charitable write-offs typically lead to a letter from the IRS asking for additional documentation. If you can provide it, you can put the matter to rest. Otherwise, you may have to write a check to Uncle Sam.
7. You are part of the gig economy.
There’s been an explosion in the number of freelance workers in recent years, which means more people are collecting 1099s and 1099K at tax time. Companies must issue this form to contractors who have been paid more than $600 in the past year. The number of 1099s and 1099K issued has increased by more than 10 percent since 2010, according to an analysis by the Bay Area Council Economic Institute.